The Supreme Court Addresses Scienter Under The False Claims Act

Scienter under the FCA

The Supreme Court found that liability under the False Claims Act (FCA) turns on the subjective belief of the defendant at the time the claim is submitted and not the objective reasonableness of the defendant’s actions.

The False Claims Act - the “Knowingly” requirement for defendant liability

The Supreme Court decided two consolidated cases related to when a claim is “knowingly” submitted to the government for purposes of liability under the False Claims Act (FCA). In United States ex rel. Schutte v. SuperValu Inc. and United State ex rel. Proctor v. Safeway, the Supreme Court rejected a lower court ruling that a defendant would not “knowingly” submit a false claim, as is required for liability under the FCA, if the defendant’s conduct, at the time the claim was submitted, represented an objectively reasonable interpretation of the relevant issue.

Defendants under the FCA in the healthcare industry have long complained regarding the ambiguity of the laws and regulations and lack of clear governmental guidance. Since its inception nearly 40 years ago, the government has recovered more than $70 Billion using the FCA. Often these recoveries involve the healthcare industry with the web of laws and regulations and where the government is a significant payor through federal programs like Medicare.

FCA Defendants argued that a defendant’s improper interpretation of ambiguous laws and guidance is not equivalent to “knowingly” submitting false claims, and have requested courts focus instead on objective criteria.

The Seventh Circuit decided in United States ex rel. Schutte v. SuperValu Inc., et al that if a defendant’s conduct complied with an objectively reasonable understanding of the law and did not conflict with any authoritative guidance, then there would not be scienter, intent or knowledge of wrongdoing, by the defendant and the defendant would not be guilty of an FCA violation even if the claim was ultimately determined to be a false/improper claim. The thought being that if there were multiple, reasonable interpretations of the law or regulation, and there existed no authoritative guidance from the government or case law at the time the claim was made, then the defendant could not “knowingly” submit a false claim if their actions reflected one reasonable interpretation.

The Supreme Court unanimously rejected the Seventh Circuit’s finding and determined that the knowledge and belief of the defendant at the time the claim was made is what matters in evaluating an FCA claim. The Supreme Court found that the process used by the Seventh Circuit could result in a later developed objective interpretation of a defendant’s actions, without identifying the defendant’s knowledge and subjective belief at the time the claim was submitted. The Supreme Court found that the Seventh Circuit’s approach was not appropriate under the law.

Under the civil FCA, "knowingly" is defined to include actual knowledge, deliberate ignorance, or reckless disregard, and no proof of specific intent to defraud is required. The Court found that even with ambiguous laws and regulations and without authoritative guidance, a defendant may be guilty under the FCA if a defendant submits a claim knowing that there was a “substantial and unjustifiable risk” that the claim would be a false claim. The Supreme Court did not offer objective guidance on what risks are “substantial” or “unjustifiable.”

This decision underscores the potential value in documenting the reasonableness of the decision-making process. In FCA cases there will likely be a focus in discovery on the defendant’s knowledge and subjective belief at the time a claim was filed.